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China and Commodities Profit Opportunities for the Quick and Bold

Commodities / Investing 2009 May 22, 2009 - 08:05 AM GMT

By: Uncommon_Wisdom


Best Financial Markets Analysis ArticleSean Brodrick writes: For weeks now on and on my blog, I’ve been talking about the new downleg in the U.S. dollar. This is bullish for commodities in general.

I’ve also been talking about how oil prices are running up even though we haven’t seen a return of U.S. demand AND how China’s economy seems to be recovering faster and even revving up.

These three things — the dollar, oil and China — are tied together, and they open the door to tremendous profit opportunities for the quick and the bold.

Looking at a weekly chart of the U.S. dollar index, you can see it has broken important support. The easiest path is lower, and it should test support at 80.

Weekly dollar has broken important support and could test 77.70

If that fails, its next support is 77.70. After that … well, then we get into “ouch” territory. This kind of move should be extremely bullish for commodities.

Let’s talk about how oil prices keep charging higher. Even before we got extremely bullish news on Wednesday — a decline of 2.1 million barrels in U.S. oil stockpiles, according to the EIA, when the consensus was for a 400,000 barrel drop, and a whopping 4.3 million barrel drop in gasoline stockpiles — oil prices had trekked higher for the last couple months.

The babbling heads on CNBC said it’s because traders are worried about unrest in ever-restless Nigeria. I think the first part of the oil rally was due more to short-covering and speculation, but oil is also accelerating due to rising demand in China.

China increased its crude imports by 13.6 percent year over year in April, guzzling 3.9 million barrels a day. China is busy building a strategic oil supply while oil prices are low. China is the world’s second-biggest consumer of oil products (the U.S. is No. 1).

And it’s not just oil. China is importing commodities of all types, lighting a fire under shipping rates …

  • China bought 3.71 million tons of soybeans in April — another record — bringing imports to 13.86 million tons in the first four months of 2009. China’s soybean imports are expected to rise 5 percent to 42 million tons in 2010 from this year, hit 45 million tons in 2011 and jump again in 2012 to 50 million tons.
  • China boosted its imports of iron ore to a record 57 million metric tonnes in April — a rise of 33 percent! That was the third record month in a row. China is the world’s biggest consumer of iron ore.
  • April saw China buy a record 399,833 metric tonnes of copper and copper products, compared with 374,957 tonnes in March.
  • China’s platinum imports rose 17.3 percent in the first quarter — at a time when automakers’ use of the metal is going down. Catalytic converters account for 60 percent of the metal.

One indicator of how fortunes are turning in commodities is the Baltic Dry Index — an index of spot rates for shipping dry bulk commodities such as coal and iron ore around the world. It hit a seven-month high this week.

The Baltic Dry Index is way off its highs

The BDI is cyclical and seems to have bottomed on December 5th — it’s up 283 percent since making that low, though still way off its highs. Is China helping drive the BDI higher? Heck, yeah!

Why is China ramping up its imports of iron ore, copper, oil, soybeans and more? Zhang Guobao, the head of China’s National Energy Administration, said his country will increase imports of commodities including oil and boost inventories of strategic raw materials because prices are at their lowest in seven years. In other words, China thinks commodities are cheap at current prices.

But it’s not just stockpiling. China is also using commodities at a ravenous pace. On Wednesday, Tony told you that Chinese auto sales are skyrocketing. In April, China’s vehicle sales jumped 25 percent over the year-earlier period, to a record monthly high of 1.15 million units.

Now for the real eye-popping part: This means the Chinese are now buying more cars than Americans. April was the third consecutive month that China has surpassed the United States in sales.

And you know how U.S. automakers are on the ropes? Not in China. GM is reaping benefits from its two joint ventures in China. GM’s China sales hit a monthly record in April — up over 50 percent from a year earlier.

So there are two good reasons for China to import more commodities — 1) to build up reserves; and 2) because its factories are ramping up. Now we’ll add a third reason … and if this one doesn’t scare you, you aren’t paying attention.

China’s Long-Term Goal — Drop the Dollar

The Royal Bank of Canada says China is reallocating its wealth as Beijing fears the U.S. dollar is in a long-term decline (I’m worried about that, too). Premier Wen Jiabao has said he is “worried” about the safety of the nation’s estimated $767.9 billion in holdings of U.S. Treasuries.

The U.S. can print a lot more dollars. But Uncle Sam can’t print more copper … or oil … or iron. It seems like a sound strategy to me, and one that the world may follow.

China hates being so dependent on the U.S. dollar. But it can’t unhook its currency from the greenback because then Americans wouldn’t be able to buy Chinese-made junk.

China and the United States are in a painful embrace — like they’re grasping each other’s throats. They’re really hoping the other guy doesn’t squeeze too hard!

While China can’t get away from the dollar now, it’s exploring ways to get away from it in the future.

So China is starting to shift its foreign exchange reserves out of U.S. dollar assets.

Sure, China takes pains to say that it thinks U.S. bonds are a good investment. But rather than listen to a hungry tiger’s words, follow the money. China is buying more short-term U.S. Treasuries while decreasing the percentage of long-term Treasuries that it buys.

China's Treasury Flows

According to U.S. Treasury data, from August 2008 to March 2009, China purchased $171.3 billion of T-bills, debt that carries a maturity of up to a year, compared with just $22.9 billion of longer-term notes and bonds with a maturity of two years or more. At the same time, China also sold $23.5 billion of long-term agency debt.

The general trend is for less buying of long-term U.S. Treasuries … like China is giving Uncle Sam a vote of “no confidence.”

When traders wise up to what China is doing, it could send the U.S. dollar tumbling even further. That would be bad news for the United States … but investors who hold commodities can help insulate themselves against the fallout.

A New World Currency Order

So if China is moving away from the dollar, what does it want to use instead? It looks like China would like to see its own currency, the yuan (renminbi), become an international benchmark.

China has signed $95 billion in swap agreements with Argentina, Indonesia, South Korea, Hong Kong, Malaysia and Belarus in recent months. This way, gradually, China hopes to make the yuan a truly international currency.

In the latest move, China and Brazil are researching how the nations can conduct trade in yuan and reals. The more they can trade in their own currencies, the less they have to rely on the U.S. dollar.

The move came as Brazil’s President, Luiz Inacio Lula da Silva, visited Beijing to strengthen ties with his country’s largest trading partner. During the visit, China is going to give Brazil more than $10 billion in loans.

Other Countries Have the Same Idea

It’s not just China making moves away from the U.S. dollar. Brazil also worked out a deal with its neighbor to the west, Argentina, to trade in local currencies. They will stop using the U.S. dollar for bilateral trade in September. Trade between the two nations amounts to more than $19 billion a year.

Brazil and Argentina are both big commodity exporters. China is a big commodity importer. This trend is bearish for the dollar longer term, and bullish for commodity prices.

How to Play These Big Trends

International shipping tends to be cyclical. If we’re at the start of a big upswing, that could be bullish for shipping stocks like Diana Shipping (DSX), DryShips (DRYS) and Excel Maritime (EXM).

As for commodities — we’re playing a bunch of them in Red-Hot Commodity ETFs. The portfolio is packed with open gains and subscribers have already banked some profits. There should be a long way to run.

The easiest way to play the China bull story is the iShares FTSE/Xinhua China 25 Index (FXI). It’s already had a great run, so be careful. And one commodity ETF you might want to consider is the iShares Commodity-Indexed Trust (GSG). It is energy-heavy but follows a big basket of commodities — and should do very well going forward.

Remember 3 Important Rules

In this wild and crazy market, there are three important things you MUST do …

  1. Buy on pullbacks — don’t chase anything, no matter how tempting. Use a protective stop in case this rally gives up the ghost and the bear rears its ugly head again.
  2. Use a profit target and don’t be greedy — bag those gains and get out.

There’s a lot more to it than that, so for Pete’s sake, be careful. This is a fast and furious market that humbles professional traders on a daily basis — but that means the profit potential is all the bigger.

Yours for trading profits,


P.S. If the funds mentioned in this article interest you, you’ll be interested in Red-Hot Commodity ETFs. I’ll be sending out new recommendations SOON. Sign up now — CLICK HERE.

Also, remember to check out my daily updates at

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